Certain creditor protection rules are extended to these derivatives and this helps to increase their security and reduce financial risks. The other side is that with excessive credit protection norms, capital markets will under price the credit risks. This means that risks that should be valued at say 100 Pounds will be considered to be worth only 80 Pounds. This increases systemic risks and helps to propagate credit booms. The reason is that the lending firm considers a risk of 80 Pounds worthwhile while extending loans whereas if the assets had a risk of 100 Pounds, the lending firm would reduce the amount lent (Chance and Brooks, 2010). The paper will examine how derivatives based on standard assets and bonds can be used as a method of mitigating risk. 1.1. OTC and ETD and risk management Two main types of derivates are available and these are over the counter derivatives – OTC’ and ‘exchange traded derivative contracts’ - ETD. OTC instruments are privately traded between two parties and the exchange is not involved. Instruments traded included forward rate agreements, exotic options, swaps and other types. The main constituents and partners in the OTC markets are banks, financial institutions and hedge funds. The market is estimated to be worth 708 trillion USD and most of it occurs in private without any public listing and declaration. ...Show more
Derivatives as a way of mitigating financial risk October 19, 2012 1. Introduction Derivative is a type of financial instrument and a contract drawn between two parties for certain assets that are subject to variables such as value of the assets, dates and notional amounts…
All activities contain an element of uncertainty, particularly projects which are time limited and undertaken to arrive at a single goal. Because of the high level of uncertainty, there is also perceived a high level of risk. There is therefore the imperative to try to understand and control this risk, through risk management techniques.
For instance, a financial institution is expected to provide customers with the necessary information. This enables such clients to make informed decisions. Customers trust the financial institutions, which are genuine and offer objective information. In addition to that, it is imperative for the financial institutions to protect the confidential information of the customer.
Risks are identified as any scenario that can cause detriment to achieving organisational goals dictated by strategic leadership that erode competitiveness or represent threat to financial stability. Many organisations have developed some form of risk management approach, however there is a modernised approach to achieving risk mitigation known as enterprise risk management (ERM).
The objectives of the research are to investigate the nature of oil spillage risks; identify and summarize the existing understanding about oil spillage risk management; discover good practices in managing oil spillage risks and to provide a new framework that summarizes the findings and can be used further for managing oil spillage risks.
This literature review on the derivates will cover on various aspects relating to the financial instrument such as types of derivatives, types of derivative contracts, the use of derivatives, and even the contribution of the derivative market to the economic function within a country. The evolution of the market led to the development of various financial instruments.
Risk management is done in order to avoid risks from arising and also to minimize their consequences. First of all, it is needed to correctly recognize all known risks because the risks cannot be mitigated unless it is identified. So, it is done thoroughly and accurately so that all the possible risks can be assessed within time.
rocess through which investors and fund managers identify potential risks of their businesses and act in such a way that their business interests are safeguarded. Allen goes ahead to assert that the decision on whether to accept or take mitigation steps towards the potential
However, in reality it is observed that the movement in the bond market and that of the CDS are not equal. The inequality is caused due to a number of reasons such as the imperfect match between the two contacts (Cornett and Saunders, 2003). During the financial crisis, the